The Hard Problem of Bank Regulation

Credit card party.

Photo by DAMIEN MEYER/AFP/Getty Images

I was up in New York City yesterday talking with school teachers about teaching financial literacy in urban public schools. A theme that really emerged from our conversation is that not only is there a lot about financial products and financial planning that kids don’t know, but that a lot of consumer financial products are things that are just bad for you and yet hard to avoid even for people who roughly know the facts.

And that’s really not so unusual. The people who smoke cigarettes aren’t confused about the health risks. People are aware that they ought to find more time to exercise. Nobody is exactly being tricked into thinking that eating doughnuts is good for you. But it’s tempting. Just like consumer credit is tempting, even if you know that over the long run you will enjoy more consumer goods and higher living standards if you avoid it.

But this is really the tough nut to crack in financial regulation. It’s fun to talk about really high-level issues that are distant from actual consumers. But at the end of the day we, as a society, need to decide whether we are OK with measures that will reduce the amount of financial problems by, in part, reducing the amount of credit that’s available to people. In retrospect, an awful lot of Americans would have beeen better off had regulators imposed strict down-payment requirements during the house price boom (because the investments were becoming highly speculative) rather than reducing them (because that was the only way to make down payments affordable given rising prices) but had you done that at the time people would have been upset because you’d be making it harder to get a mortgage. By the same token, if you reimposed some kind of usury laws limiting credit card interest rates, some people would be unable to get a credit card and they’d be upset. But in both cases, I think ultimately you’d do more good than harm, just as the past 30 years worth of anti-smoking regulations have done a lot to improve public health even while annoying people.